Introduction
Welcome to Part One of the Phases of Price series.
In this lesson, we’re breaking down Consolidation, the phase where price compresses into a range before making its next decisive move. Understanding this phase is critical, because trading inside a consolidation without a plan often leads to premature entries, stop-outs, and frustration.
What Is a Consolidation?
A consolidation is when price remains internal between a defined high and low without taking out either side for an extended period.
Think of it as a “pause” in the market:
Large range → small range
Market energy is stored before the next expansion.
Consolidations typically form:
After a large range move (expansion).
When price reaches a higher time frame level.
Why Consolidation Matters
Inside the range, price action is unpredictable.
Rather than guessing the breakout direction, the smarter approach is to:
Wait for manipulation (a liquidity sweep of one side of the range).
Trade away from the side that was taken out.
This method aligns with the classic Power of Three model:
Accumulation → Manipulation → Distribution.
The other method is to:
- Wait for a confirmed breakout of the range and the continuation that follows.
💡 Pro Tip: For a breakout, price should fail to manipulate a high or low and not close back inside the range. This will form a new continuation on the retest.
Types of Consolidations
Continuation Consolidation
- Occurs mid-trend, without hitting a higher time frame objective.
- Expect price to break in the direction of the prevailing trend after either a sweep of the opposite side or a breakout.
Reversal Consolidation
- Forms after reaching a higher time frame level.
- Often signals a trend change if followed by a liquidity sweep and a change in the state of delivery (CISD).
How to Trade Consolidations
Define the Range
Mark the high and low where price has remained internal.
Wait for Manipulation
Price sweeps one side of the range:
Bullish bias → look for a sweep of the low.
Bearish bias → look for a sweep of the high.
Confirm With Change in State of Delivery (CISD)
Wait for a closure through opposing candles (protected swing formation) to confirm the manipulation.
Enter on a continuation following a CISD confirmation.
Place stop beyond the protected swing.
Target liquidity pools (equal highs/lows, fair value gaps).
SMT (Smart Money Technique) in Consolidation
Also know as Smart Money Technique, SMT can play a critical role in consolidation trading. Even if your market doesn’t sweep a level, you can treat it as if it did if a correlated market sweeps the same side.
Example:
- Nasdaq stays inside range, but S&P500 sweeps the low.
- Treat Nasdaq’s low as protected once CISD confirms on the S&P.
Using Equilibrium in Consolidations
Measure the EQ (50%) of the range:
- Price tends to return to EQ if price continues to consolidate.
- Deviations from the range often revert back to EQ until breakout occurs.
Examples of Consolidation Trades
Continuation Example
- Large range move up into consolidation..
- Sweep of the low → CISD → Continuation higher.
💡 Pro Tip: Notice how we also took the highs first? Why isn’t this a consolidation reversal? Price never formed a bearish CISD.
Reversal Example
- Consolidation forms prior to a higher timeframe key level
- Price breaks lower.
- Following a CISD, the consolidation is now the accumulation of the AMD.
Reversal Example
- Following a large expansion higher, price consolidates.
- Avoid price during this consolidation, wait for the high or low to be taken.
- price has an aggressive move out and back into the range forming a wick.
- Following the CISD, this protected high should remain if price is to trade lower.
💡 Pro Tip: Avoid the consolidation and look for a “V” shape reversal forming at consolidation highs or lows.
Key Takeaways
- A consolidation is a pause between a high and a low.
- Avoid trading inside the range.
- Wait for manipulation, confirm with CISD, then trade the continuation or reversal.
- Use SMT to validate setups even if your market doesn’t sweep the range.
- EQ is a valuable reference for price behavior inside the range.
